Monday, January 7, 2008

State of the Market - 1/7/08

A pretty volatile day today in the markets today as they opened a little higher to start, quickly sold off with what I sensed was a hint of panic selling based on individual stock action, rallied back upward, tested the morning lows in the afternoon, and then finally closed mixed. The Dow, S&P 500, and Russell 2000 were up around 0.2-0.3% overall while the Nasdaq was down 0.2%. So a wild day ended up closing pretty close to flat. Here is a chart of the S&P.

Chart from Telechart2007, Courtesy of Worden Brothers, Inc.

Technically, I think this day could be significant in the short-term because both the Dow and S&P held their recent lows on volume that was a little higher than yesterday. The Nasdaq has had seven straight down days but finished off of their session lows. With the market at or approaching oversold levels, I believe we are likely to see one of two possibilities for the rest of this week - either this could be a start of a reflex-type bounce off of the oversold levels, which could put us back in a position to take some more shorts, or we could just chop around here in a range for a week or so before going lower. Either way, I don't think today's action changes the longer-term outlook - we are likely still headed much lower over the next few months. There has been too much major damage done to charts over the past few days for anything meaningful to develop on the long side of the market. It is still not the time to be going long unless you are very short-term and want to play a possible bounce.

I covered the last of my shorts this morning as they broke some support levels. It seemed like a good time as I saw many stocks like AAPL, GOOG, and FSLR making huge down moves in a real short period of time, and the moves seemed a bit panicky to me. I am looking to reshort some of these same stocks if they bounce back up toward their 50 day moving averages. RIMM and GRMN would both probably be good shorts if they get back up around $110 and $100 respectively. I may be making a mistake covering too early as these stocks may continue to go straight down and as I learn more about playing the short side, I may hold my positions longer, but for now I am happy with a 10-15% gain and moving on to wait for another opportunity.

Chart from Telechart2007, Courtesy of Worden Brothers, Inc.

I actually took two small positions today in anticipation of a bounce. I would probably be better off just sitting out for a few days, but I thought it was worth the risk and they will be very short-term trades of few days. I already got stopped out of one of the positions today, and the second one is in good shape. I did learn something today however - whenever I plan for a possible trade before the day starts, it usually works out OK. When I take a trade intraday that I didn't think of the night before as a possibility, I get myself in trouble. Same thing happened today - the first trade was one I thought would make a good candidate once the market started to bounce, whereas the second one was one where I reacted to what happened in the morning and made a quick decision. You can probably guess which of those two I was stopped out of. I have been happy overall with my start this year but this reminds me that I always have to stay on my toes and watch out for those little faults that can hurt you so bad as a trader if you are undisciplined and let them.

After looking through my charts, I continue to see a lot of stocks that are breaking down or have been broken and will need a lot of time to recover. A rally would be nice here to get some of these stocks back into perfect shorting positions, but who knows if we will get that - I think it is likely but not guaranteed. I think this is where myself and many other traders need to show patience and not force trades that are not really there, both short and long. After probably forcing one today, I hope I can show better patience the rest of this week - there will be more opportunities, we just need to wait for them. Good luck tomorrow.

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